Three top investment trusts

With stock markets still vulnerable, investors need to hedge their bets, says fund manager Peter Walls. Here, he tips three investment trusts to buy now.

Each week, a professional investor tells MoneyWeek where he'd put his money now. This week: Peter Walls, fund manager, Unicorn Mastertrust Fund.

With the US budget impasse adding to the long list of worries on the minds of investors, it is perhaps surprising to note that the investment trust sector is in fine fettle.

More trusts than ever are trading at or above net asset value (NAV the value of their underlying assets), and new share issues through initial public offerings (IPOs), and secondary fund raisings have been coming thick and fast.

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While I'm not complaining about the narrowing of discounts (where shares trade below their NAV) across the sector, it is becoming ever harder to find new opportunities at attractive valuations.

Meanwhile, opinions on the short-term outlook for stockmarkets are sharply divided. The bulls are eagerly anticipating a year-end rally, whereas one widely reported bear is suggesting that the American market could crash by 75%!

Political risk remains high and it is hard to believe that the central banks of the developed world will be able to finesse the tapering of quantitative easing (QE) without at least some volatility in markets.

So it is probably a good idea to hedge your bets wherever possible and to favour trusts with good liquidity. This is easier said than done in the investment trust sector, as market corrections typically lead to widening discounts, while gearing (borrowing money to buy shares) works against you.

While in recent years many trusts have adopted discount control mechanisms to stop discounts growing too large some are more robustly applied than others. The ratings of trusts that state that shares will be bought back for cancellation in normal market conditions' or by reference to the discounts of their peers could be more vulnerable in the event of a market correction.

With this in mind, the first two of my selections offers the chance to participate in further market gains while limiting discount downside risk.

Witan Investment Trust (LSE: WTAN) has been overseen by chief executive Andrew Bell since February 2010, since when it has out-performed both the UK and global equities sectors.

The trust applies a multi-manager process: there are 13 specialist managers just now. Witan has a proactive share buy-back policy, and the shares currently trade at discount of around 8.5%, within the board's desired target of a sustained 10% or below.

The discount control mechanism operated by Foreign & Colonial Investment Trust (LSE: FRCL) seeks to "achieve a low volatile discount with a ceiling of 10%", the level at which the shares currently trade.

Although FRCL's policy does contain the normal market conditions' caveat, the trust has vigorously defended its 10% target in the past. Performance at the NAV level has out-paced the UK market over the last one, three and five-year periods.

RIT Capital Partners' (LSE: RCP) performance has disappointed over the last five years as the trust's capital preservation policy held back growth while stock markets recovered from the financial crisis. Even so, the long-term record remains impressive: since inception in 1988, the share price has grown by 11.5% a year.

Once a darling of private investors, the shares regularly sat at a premium to NAV, but now trade at a discount of 8%. Unlike the other two trusts there is no stated discount control mechanism in place, although some shares were bought for cancellation in August this year.

Peter Walls is fund manager of the Unicorn Mastertrust Fund.